Fiscal Sponsorship: The Risks of Being a Fiscal Sponsor

Worried About Growing Risk

Fiscal sponsorship can be an incredibly valuable tool for incubating charitable nonprofit projects and creating efficiencies through the provision of administrative support to several discrete projects. The key to its value lies in how well the fiscal sponsor meets its responsibilities and obligations and understands how to appropriately manage the risks of sponsorship. In this post, which is intended to complement the April 21 Hot Topic Call I’m participating in with Steve Moody from the Nonprofits Insurance Alliance Group for the National Network of Fiscal Sponsors (register here), we’ll discuss some of the major risks for a fiscal sponsor that provides comprehensive (or Model A) fiscal sponsorship.

The Responsibility of a Fiscal Sponsor

In a comprehensive fiscal sponsorship, the fiscal sponsor owns the project and the sponsor is responsible for all activities of the project and, generally, any of the project’s liabilities, regardless of whether the sponsor was aware of such liabilities. The rights of the other party to the fiscal sponsorship agreement (often, a project committee convened by the project founders) are typically limited to moving the project to another qualified fiscal sponsor or charity or terminating the project, though the founders and project committee members are typically involved in their individual capacities as employees or volunteers of the fiscal sponsor responsible for project management and fundraising.

The Risks of a Fiscal Sponsor

Mission Drift

An organization that serves as a fiscal sponsor must make sure its mission is advanced by each and every project. Operating outside of its mission may be a violation of its governing documents and charitable trust principles.

Reputational

An organization’s reputation is one of its most valuable assets and must be protected vigilantly. Even a single problematic project (e.g., one that publicly communicates values fundamentally different from the organization’s values) could have disastrous impact on a fiscal sponsor’s reputation and future prospects.

Liability for Activities

Because the program’s activities are the fiscal sponsor’s activities, the fiscal sponsor is ultimately responsible for ensuring that the activities are being engaged in consistent with all applicable laws and with the appropriate level of care. If some person or entity is hurt or otherwise suffers damage as a result of negligent actions or omissions of a project representative, generally, the fiscal sponsor will be responsible. The following questions with respect to each project should be considered:

Qualification

Is the fiscal sponsor qualified to carry out charitable activities in the states or jurisdictions where the project is operating? Does it have all appropriate licenses and permits? Is it exempt from state taxes in those states?

Employment

Does the fiscal sponsor have the appropriate infrastructure to employ individuals connected with the project? If the project director is responsible for employing project employees, does she or he have sufficient knowledge and training to comply with applicable employment laws? Does the fiscal sponsor provide a policy that the project director must follow with respect to interviews, background checks, hiring, training, compensation, disciplinary procedures, and terminations?

Intellectual Property

Is the project using or planning to use any intellectual property (copyrights; trademarks; patents; trade secrets, including donor lists) that might infringe on the rights of another party?

Private Benefit

What are the risks of the project conferring a prohibited private benefit (e.g., excessive payment) to an individual or business entity? If any directors, officers or other disqualified persons with respect to the fiscal sponsor involved with the project, what are the risks of an excess benefit transaction?

Lobbying and Electioneering

Will the project engage in lobbying, and, if it will, does the fiscal sponsor have appropriate knowledge and control to ensure that all registration and reporting requirements (e.g., LDA, FECA, California Political Reform Act) are met? Is it clear that the project cannot and will not engage in any activities that might violate the 501(c)(3) prohibition against political intervention, including ensuring that none of the project’s resources (including email) are used to engage in electioneering activities?

Collaborations

Will the project engage in collaborations with other entities, and is there a policy over what types of collaborations are permissible only with the approval of the fiscal sponsor? What are the risks of creating a partnership for which the sponsor may be jointly and severally liable?

Tips for Serving as a Fiscal Sponsor

Evaluating Projects

  • Are the project’s activities consistent with 501(c)(3)?
  • Are the project’s activities in furtherance of the fiscal sponsor’s mission?
  • Are the project’s goals and activities consistent with the fiscal sponsor’s values?
  • Does the project pose risks that the fiscal sponsor is particularly concerned about or have little familiarity in managing?
  • Does the fiscal sponsor have the internal capacity to oversee and support the project in a safe and responsible manner?

Vetting Project Directors

  • Would the project director be an individual that the fiscal sponsor would hire to lead a purely internal program?
  • Did the fiscal sponsor vet the project director in a similar manner as it would for an internal program manager with broad leadership autonomy?
    • Interview
    • References
    • Background check
  • Does the project director have sufficient expertise and experience to operate, manage, and raise funds for the project?

Fiscal Sponsorship Agreement

  • Does the agreement differentiate between (1) the party signing the contract with the fiscal sponsor and (2) the individuals who will be managing or working for the project whether as employees or volunteers?
  • Does the agreement provide the sponsor with the authority to approve any successor fiscal sponsor or nonprofit to which the project assets would be transferred in the event of a termination of the agreement?

Onboarding

  • Does the fiscal sponsor make clear to the project leaders that the project does not and cannot operate independent of the fiscal sponsor and that another entity operated by project leaders (if any) must be distinct in name and activity from the project?
  • Does the fiscal sponsor have a policy and practice in training a project director in any areas of deficiency that may pose a risk to the sponsor?
  • Does the sponsor equip the project with appropriate policies, including those regarding conflicts of interest, whistleblowers, document retention/destruction, gift acceptance, communications (including websites and social media), and internal controls?
  • Does the sponsor emphasize the importance of timely and accurate reporting to allow for appropriate oversight?
  • Does the sponsor communicate how the project director and leaders may access administrative and legal assistance from the sponsor?

Insurance

  • Does the fiscal sponsor have appropriate and sufficient insurance coverage that accounts for the activities of the project?

Final Thoughts: The Fiscal Sponsor’s Board

A fiscal sponsor is ultimately responsible for all of its Model A fiscally sponsored projects. Accordingly, the board members of the fiscal sponsor are ultimately responsible for all of the activities and affairs of each of its projects. The fiscal sponsor’s board may delegate management of a project to a project director and intermediate oversight to the sponsor’s administrative leaders. But management of all projects remain under the ultimate direction of the fiscal sponsor’s board notwithstanding any attempt to contract out its oversight responsibilities.

One thought on “Fiscal Sponsorship: The Risks of Being a Fiscal Sponsor

Comments are closed.